Notes From Underground: Brazil Shaves Their Rates Unexpectedly

First of all, NOTES will be on HIATUS for a well deserved rest from the turmoil of global events and the chaotic impact they have had on markets.

Just as the vacation was beginning, the Brazilian central bank cut the SELIC rate by 50 basis points, from 12.5% to 12%. Inflation has been starting to head down from 7% to a recent 5% or less, giving the Brazilian leadership some room to lower rates and hopefully remove the long-time upward pressure on the REAL. President Dilma Rousseff has tried for months to find a way to prevent the REAL from rallying, thus preventing the growth of the manufacturing sector in Brazil. As commodity and raw material exports boom due to global demand, the manufacturing sector has been plagued by an uncompetitive currency and domestic demand being met by cheaper imports.

For those in the Latin American markets, it will be important to watch the yield curves in Brazil to determine if rate cuts are going to have the intended effects. Always watch the actions at the global peripheries for they will tell the story of any change in the global economy before actions by the developed nations in the economic center of the world. Even as the Brazilian cut was a surprise, I doubt that this will be a one-off event as the government has previously implemented other tools to stem the rise of the currency.

Quick Hitter#1: Friday is UNEMPLOYMENT DATA and it seems that the consensus is for a gain of 90,000 NFP, a rate of 9.1% and average hourly earnings growth 0.2%. The payroll jobs number are important because it can be skewed by the VERIZON strike so be cautious at the first look. If the number is on target that will be a good sign as the effect of the Verizon strike will be filtered out next month adding to the numbers. The other part of the NFP will be to watch if state and local governments have stopped bleeding jobs for that has been the biggest drag on recent data. If state and local governments have stopped subtracting that will also be a positive.

The rate will only be important if it rises to 9.3% for that will be the variable that places the largest impact on whatever the Obama administration is planning on the jobs front in its post Labor Day speech–high headline unemployment rates is what grabs the media’s attention. Pay close attention to the AVERAGE HOURLY EARNINGS for last month showed a robust 0.4%. If the AHE is again stronger than the consensus 0.2% it will be indicative of the high personal spending numbers from earlier in the week and reflect that employers were beginning to loosen the purse strings in order to keep employees. Another 0.4% or higher will probably a positive for the stock market in our zero interest rate environment.

Quick Hitter#2: Europe is again on the front burner as the August rest period is over and all the simmering problems have not evaporated. German politics are causing much angst in the EU as Chancellor Merkel is being pressed to deliver on her previous commitments to European bailouts via an enhanced EFSF. Can the German leader hold her government together and provide the financial support necessary to support the debt stressed peripheries?

The GREEK PROBLEM is morphing into a European growth problem as austerity is all the rage. The weak economic data released this weak is placing more downward pressure on European banks as the negative feedback loop of high debt, austerity budgets lead to slowing growth which means greater government deficits. Even IMF director Christine Lagarde has been attacked for her comments from Jackson Hole about the need for increased capital for large European banks. Lagarde is a centerpiece of the European financial scene so don’t look for the IMF to step back from the terrible financial situation currently facing the European Union.

“The Philadelphia Fed said its factory-sector index of general business activity fell to -30.7 this month from 3.2 in July and -7.7 in June. The August index was the lowest since March 2009, when the U.S. was in recession, and has never been this low without the economy being in recession.”

Another great summary. Brazil has been active of late with Finance Minister Mantega increasing the current year fiscal surplus by R$10billion and then the central bank cutting 50bp out of left field. Global concerns are natural at this stage and it’s nice to see a central bank out in front of the curve but I hope political globetrotters see the whole picture and not expansionary austerity. If only the Europeans would pay attention.

Great tip on eyeing the Brazilian yield curve as well. I’ll be sure to put it on my quote board.

Michael G.—nice insight on the correlation btw.philly fed and unemployment–this was a great add to the blog and makes it a place of quality thought –as usual the conversation is a great positive especially as the world becomes electronic and very little value added comes through the general system of mass media

When you get back from well deserved vacation, can you comment on the CANDO a bit? Why is it so stagnant? Canada has a lot of resources and some of the safest banks in the world. China & India seems they can step in the shoes of the American consumer for there goods and services.